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Taiwan’s housing market is gaining momentum

Last Updated: October 10, 2018

 

After more than two years of house price falls, Taiwan’s property market is gaining momentum. House prices are rising gradually. Demand is surging. Residential construction activity is also increasing again.

Taiwan’s Lutheran home price index increased 1.83% (0.25% inflation-adjusted) during the year to Q1 2018, the biggest y-o-y rise in more than three years, according to Sinyi Real Estate Planning and Research. Quarter-on-quarter, nationwide house prices rose by 0.49% (0.89% inflation-adjusted) in Q1 2018.  

All the country’s major cities continue to gain momentum.

  • In Taipei, the capital, house prices rose slightly by 0.68% (-0.88% inflation-adjusted) during the year to Q1 2018, after a y-o-y decline of 1.2% in the previous quarter.
  • In Xinbei, house prices rose by 2.45% (0.86% inflation-adjusted) y-o-y in Q1 2018, an improvement from last year’s 0.6% growth and the biggest rise since Q4 2014.
  • In Taoyuan, house prices rose by 4.79% (3.17% inflation-adjusted), its fifth consecutive quarter of y-o-y growth and the biggest expansion since Q2 2014.
  • In Hsinchu, house prices rose by 4.19% (2.57% inflation-adjusted), up from last year’s 2.1% rise and the biggest y-o-y growth since Q4 2014.
  • In Taichung, house prices rose by 3.77% (2.16% inflation-adjusted), an improvement from the 2.4% growth recorded in Q1 2017.
  • In Kaohsiung, house prices increased slightly by 0.77% (-0.79% inflation-adjusted), its fifth consecutive quarter of y-o-y increase.

Demand and supply are both rising strongly. In Q1 2018, the number of housing transactions in Taiwan soared 10.6% y-o-y to 66,060 units, following an 8.4% rise in 2017, according to the Ministry of Interior. Over the same period, the total number of residential construction licenses issued rose by 43.6% to 27,513 from a year earlier.

Taiwan house price index

The housing market is expected to strengthen further this year, on the back of improving economic fundamentals, as well as robust demand, according to local property experts.

In the first quarter of 2018, the economy expanded by 3.04% from a year ago, at par with the previous quarter’s 3.28% growth, and up from annual average growth of 2.4% from 2011 to 2017, amidst rising exports driven by strong global demand for smartphones and other hi-tech electronic gadgets, according to the Directorate General of Budget, Accounting and Statistics (DGBAS).

Demand rising strongly

Taiwan property transaction

In 2017, property transactions in Taiwan rose by 8.4% y-o-y to 266,086 units in 2017, in sharp contrast to annual declines of 16.1% in 2016, 8.7% in 2015 and 13.8% in 2014, according to the Ministry of Interior. In Taiwan’s six major metropolitan cities, 203,879 were units sold in 2017, up 11.85% from a year earlier.

During the first quarter of 2018, property transactions surged 10.6% y-o-y to 66,060 units.

All the country’s major metropolitan areas saw rising property transactions in Q1 2018:

  • In New Taipei, property transactions rose by 4.5% y-o-y to 12,522 units in Q1 2018.
  • In Taipei, the capital city, property sales soared 26.5% y-o-y to 6,573 units.
  • In Taoyuan, transactions increased slightly by 0.4% y-o-y to 7,657 units.
  • In Taichung, transactions rose by 7.5% y-o-y to 9,272 units.
  • In Tainan, transactions rose strongly by 22.8% y-o-y to 5,226 units.
  • In Kaohsiung, transactions rose by 3.4% y-o-y to 8,029 units.

Housing affordability remains a major problem

Taiwan house price to income ratio taipei

Taipei is one of the world's most expensive cities. Taipei’s house price-to-income ratio has risen sharply from just 6.4 in 2004 to currently about 15.5, according to the country’s Ministry of Interior – higher than London (8.5x), New York (5.7x), or Sydney (12.9x). Hong Kong is still the world’s least affordable market, with a score of 19.4, according to the research group Demographia.

“Unaffordability remains a serious issue, as a reasonable home price-to-income ratio is between 4 and 6,” said Linda Chou, land economics professor at Takming University of Science and Technology. “Higher ratios would translate into heavy debt burdens and deprive home owners of a decent quality of life.”

Housing demand was boosted after 2009 when the government cut inheritance tax rates from 50% to 10%, and interest rates were cut.  Unmonitored speculation, low housing supply, and a long tradition of homeownership have pushed house prices in Taiwan, particularly in the capital city, and particularly on high-end properties. A three-bedroom apartment, which cost just TWD6 million to TWD7 million in 1995, was sold for about TWD20 million last year.

From 2001 to 2017:

  • In Taipei City, the house price index rose by 187% (136% inflation-adjusted)
  • In Xinbei, the house price index rose by 205% (154% inflation-adjusted)
  • In Taoyuan, the house price index rose by 173% (127% inflation-adjusted)
  • In Hsinchu, the house price index rose by 118% (82% inflation-adjusted)
  • In Taichung, the house price index rose by 224% (170% inflation-adjusted)
  • In Kaohsiung, the house price index rose by 163% (119% inflation-adjusted)

“Unfortunately, buying a home remains unaffordable for most young Taiwanese, a situation we don’t expect to change in the medium term,” said Emily Dabbs of Moody’s Analytics. An average household in Taipei needs to pay two-thirds of income for a mortgage loan, far above the affordable limit of 30%.

Dramatic measures introduced to curb speculation

Worries about mainland speculators peaked in early 2008 when residential property prices rose by more than 10% y-o-y during the first quarter. Upward pressure increased again, when Chinese banks based in Taiwan were able to offer mortgages after the signing of an MOU in November 2009.

From October 2009 onwards, the central bank has actively urged banks to closely monitor mortgage-lending risks.  It asked banks to reduce loan-to-value ratios, raise interest rates, and remove grace periods related to loans for investment properties. The central bank also conducted a round of targeted examinations related to real estate lending.

A big step was to assign a 100% risk weighting to non-owner occupied residential mortgages. Risk weightings for other home mortgage portfolios range from 50% to 80%, compared with 10%-20% for banks in developed markets in the Asia-Pacific that practice the Internal Ratings-Based Approach to credit risk. 

A luxury tax was introduced in July 2011, with second homes not occupied by the owner and sold within one year of purchase taxed at 15%, and those sold within two years of purchase taxed at 10%.

In March 2014, property taxes on non-owner-occupied residential properties were raised to between 1.5% and 3.6%, from the current range of 1.2% to 2%.

Inspections of pre-sale house transactions were tightened. State-owned bank lowered loan-to-value ratios for first-time buyers from 80% to 70%, and to 50% to 60% for people owning more than one property.

A new property gains tax of as much as 45% took effect on January 1, 2016. Property sellers are now required to pay between 15% and 45% of gains based on market prices, instead of the previously used government-assessed values. Qualified property sellers with gains of less than TWD4 million (US$120,000) are exempt from the tax.

These measures caused house prices in Taiwan to drop 7.9% (3.7% inflation-adjusted) from Q2 2014 to Q1 2016.  Growth was a meagre 1.3% (-0.2% inflation-adjusted) from Q2 2016 to Q1 2018.

Residential construction activity increasing again

Taiwan residential construction

After a three-year slump, residential construction activity is rising again. In 2017, the number and area of residential construction licenses in Taiwan rose by 16% and 15%, respectively, according to the Ministry of Interior.

The upward momentum continued this year.

  • The number of residential construction licenses surged 43.8% y-o-y to 36,409 in the first four months of 2018
  • The total floor area of residential construction licenses increased 36% y-o-y to 5.67 million square meters (sq. m.) over the same period

New housing loans surge

Taiwan interest rates

Housing loans have hardly increased 2009-2017, as a result of the central bank's macro-prudential measures.

Yet interest rates for housing loans in Taiwan are among the lowest in the region. Most residential mortgages in Taiwan are variable rate, with an average maturity of 25 years. The average interest rate for housing loans stood at 1.629% in April 2018, slightly down from 1.666% a year earlier. The Central Bank of the Republic of China (Taiwan)’s benchmark interest rate currently stands at 1.375%, unchanged since June 2016 when it was cut by 12.5 basis points.

Taiwan housing loans

Although total outstanding housing loans grew by an average of 4.2% annually from 2009 to 2017, they remained absolutely steady as proportion of GDP from 2009 to 2017, at 37% of GDP.

During the first four months of 2018, the amount of new housing loans surged almost 25% from a year earlier, to TWD155 billion (US$5.2 billion), according to the central bank. Likewise, outstanding housing loans increased 4.6% y-o-y to TWD6.72 trillion (US$225.2 billion) in April 2018.

Taiwan’s vanishingly low rental yields

Taipei now vies with Monaco for the lowest yields in the world.  Taipei is not a happy place to be a landlord. The owner of an apartment in Taipei will be lucky to realize 2% yields, except on the very smallest apartments.  Currently, average rental yields in Taiwan hover around 1.5%.

Such low yields are often a sign of an overvalued market. Given that the Global Property Guide’s figures are for gross rental yields, i.e., do not make any allowance for vacant periods, for legal costs, administration costs, cleaning and repairs, rental taxes, property taxes, and other taxes, it is safe to say that landlords in Taiwan earn nothing on their apartments.

Paradoxically Taiwan has one of the highest home ownership rates in the world at 87%, while social housing accounts for about 5% of households. And the trend towards home ownership is increasing. Because of this, Taiwan’s rental market is quite small, around 8% of around seven million households.

China-Taiwan relations reached new low after Tsai Ing-wen took power

Taiwan unemployment

In the January 2016 presidential elections, Tsai Ing-wen led the Democratic Progressive Party (DPP) to landslide victory and became Taiwan’s first female president.

One of Tsai’s key economic policies is to reduce Taiwan’s reliance on Mainland China, which accounts for around 40% of the island’s exports. Tsai plans to form closer ties with the ASEAN.

Mainland China is highly suspicious of Tsai, warning her against any attempt at a formal breakaway. Early in 2016, the Chinese government announced that it had cut off official contact with Taipei. In December 2016, Taiwan sent a blunt message to China by preparing its military forces and stepping up its training exercises to fend off Beijing’s threats.

Last year, Taiwan’s relations with China reached a new low after China decided to boycott the Olympic-style sporting event, 2017 Summer Universiade, which was held in Taipei in August 2017.

In May 2018, the West African state of Burkina Faso severed ties with Taiwan and renewed relations with China, amidst the latter’s assurance of providing development assistance in the country. Burkina Faso was the fourth country to cut ties with Taiwan since Tsai came to office, following the Dominican Republic, Sao Tome and Principe, and Panama.

“China stealing our allies, pressuring our international space won’t shrink the distance across the strait and won’t allow for peaceful, friendly development of cross-strait relations,” said Taiwan’s foreign minister Joseph Wu.

Taiwan now has only 18 diplomatic allies left.

China’s campaign to isolate Taiwan extends to minute details. In the past months, Beijing has been sending warning to airlines to list “Taiwan, China”, rather than just “Taiwan”, on their websites. The move seems working after The Associated Press found that about 20 carriers, including Air Canada, British Airways, and Lufthansa, now refer to Taiwan as a part of China on their websites. In addition, China fined a Japanese clothing company recently for listing Taiwan as the “country of origin” on packaging.

Relations between Mainland China and Taiwan thawed after President Ma of the Kuomintang Party (KMT) assumed office in May 2008. He vowed greater cooperation with Mainland China and denounced independence for Taiwan, a sharp contrast to his nationalist but corrupt predecessor, Chen Shui-bian. In November 2009, several memorandums of agreement between Taiwan and China on financial cooperation were signed. These gestures reassured investors and home buyers alike. In June 2010, an Economic Cooperation Framework Agreement (ECFA) was signed by Taiwan and China. President Ma also accepted the 1992 consensus, which played a crucial role in lowering tensions with China and boosting cross-strait economic ties.

Ma was reelected in the 2012 presidential elections. Cross-straits trade nearly doubled during Ma’s term, reaching US$198 billion in 2014. Tourism flourished, with nearly three million Chinese tourists a year.

In June 2018, the United States officially opened the American Institute in Taiwan (AIT), which will serve as the US’ de facto embassy in Taipei, escalating further the tensions between Taiwan and Mainland China.

Economic outlook improving

Taiwan gdp inflation

The Taiwanese government recently raised its GDP growth forecast for 2018 to 2.6% from the last estimate of 2.4%, according to the Directorate General of Budget, Accounting and Statistics (DGBAS) due to improving exports driven by strong global demand for smartphones and other hi-tech electronic gadgets.

In the first quarter of 2018, the economy expanded by 3.04% from a year ago, at par with the previous quarter’s 3.28% growth, thanks to strong exports. Over the same period, Taiwan’s exports reached US$79.74 billion, up 10.6% from a year earlier.

Taiwan, heavily dependent on exports, was seriously affected by the US economic recession in 2008. The economy bounced back in 2010 with spectacular growth of 10.6%, but since then growth has been modest. The Taiwanese economy grew strongly by 2.8% last year, after annual growth rates of 1.4% in 2016, 0.8% in 2015, 4% in 2014, 2.2% in 2013, 2.1% in 2012, 3.8% in 2011, and 10.6% in 2010, according to the International Monetary Fund (IMF).

Inflation of 1.49% is expected this year, according to DGBAS.

Unemployment fell slightly to 3.64% in April 2018, from 3.67% in a year earlier, according to the National Statistics. Unemployment averaged 4.3% from 2000 to 2017.

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